Markets don’t actually collide, you know

So Baruch had a go at reading the El-Erian book, When Markets Collide, by the fire in his Swiss ski chalet. He bought it because everyone seems to like it. It’s the FT’s 2008 business book of the year, on top of the Economist’s Most Interesting Reads list, etc.

Everyone who likes it is wrong. It is in fact unreadable; I only managed to get through about 100 pages and had to put it down. It is a bad book.

Let me preface everything that follows by saying unequivocally that Dr El Erian (if we are going to be formal about this), is a super brain. He gives good (if a bit stuffy) op ed in e.g. the FT. He is very good at describing how we got into our current mess, and I particularly appreciate his “heart attack” metaphor in terms what what has happened to the global economy. He even “drew inspiration” from Taleb, which makes him OK in my book. I hereby nominate him as a Fellow Collegiant of Ultimi Barbarorum, passed nem con.

The book even starts out OK. I appreciated chapter 1 a lot, where Dr El Erian points out the weirdness, the “abberations, conundrums and puzzles” of the years before the onset of our current difficulties: the inverted yield curves; the reversal of normal cross-border flows, where emerging economies lent money to developed ones; an across-the-board reduction in global risk premia. Signs and portents, like comets and plagues of frogs before catastrophes, or the eerie calm and strange sunsets before the hurricane. At least in hindsight.

Getting further into the book, however, things began to dawn on me. I realised I was reading something in the style of one of those full page adverts for Kazakhstan, full of dry, formal, meaningless prose like this:

underlying global transformations will play a major role in defining and influencing the investment and policy landscape for some time to come.

This sentence made me cross at many levels; what else would an “underlying global transformation” do if not a bit of defining and influencing? Cook rabbit stew? Why defining and influencing? What if it just defined without influencing? If it was a merely ostensible global transformation would it neither define nor influence? What did it all mean? The style of this book was a complete drag. It murders attention, I found my eyes drifting over large sections of text without finding anything to anchor the eye and brain to. Whole chapters sped by in a blur, unregistered because they were simply too boring. No-one talks like this. No-one even presents like this, and if they did it would be a disastrous presentation. Why should a book qua a book be somehow let off the obligation to be clear and direct, easy to understand without prolixity and pseudo-central banker ellipsis?

Style aside, I was beginning to have problems with the content, too. There is a lot of the bleeding obvious, and a lot which is out of date even though it is copyright 2008. By the time I stopped reading at about page 100, he was banging on about the destination at the end of these jolly important global underlying changes (which, Dr. El Erian tells us right at the start, he will refer to as “transformations”. Clearly a technical term), and I thought: I’ve read all this before. Here are the 3 main characteristics of “the destination”:

Emerging markets will be more important. I always supposed that’s why they were emerging, but never mind

New pools of capital (read sovereign wealth funds) will be more important. Yes, everyone says that, but actually, where did they go? Didn’t they get their faces ripped off buying Citigroup? At the rate we’re going any pool of capital will be more important

We won’t be able to trade purely on economic fundamentals any more (were we ever?), but will have to think about the “technical dimensions” and impact of financial innovation. Again; I think that’s wrong; one of the things we are likely to have a lot less of in the future is financial innovation, unless sanctioned by some bureaucrat at the Treasury.

Inevitably “the journey” will also be important, says Dr El Erian. My Mum could have told me all of this too, or at least wouldn’t have been surprised by any of it. And she’s not the most impressive financial brain the world has ever seen (her talents lie elsewhere); honestly, she believes in fairies.

The other main problem with the conclusions of the book is that they aren’t that useful. At no point, for instance, does he predict that at the start of 2009 we will all be as royally fucked as we are. I would have paid to know that in advance. It also seems to be aimed at global generalist investors, ones who manage endowments, for instance, and policy makers. While they may be wowed, it is not a very broad audience, and doesn’t include me. But I don’t think they would be wowed if they had put to work the portfolio Dr El Erian suggests in the book. Or if wowed, probably not in a good way. This may be the reason why the Harvard Endowment, as our now very important fellow collegiant Felix points out, is in the shitter. An excess of non-USD assets, too much in “real assets” like commodities, some dodgy structured products, and a strange attachment to no-good private equity and hedge funds has basically blown up and the faculty have had to move from vintage port to 2 buck chuck.

Dr. El Erian managed the endowment for 2 years until 2007, about the time he started writing this book. So it wouldn’t be a big stretch to think that he left Harvard with the endowment invested in the proportions he mentions here. In his defence, looking at someone’s portfolio as invested mid 2007 and judging his worth as an investor from that is not totally fair, but it does suggest the book is somewhat out of date. A measure of how good an investor one is is also how one reacts to events, and even the worst foes of Dr El Erian (a group I am not part of) would imagine he might have changed it a bit in the interim.

But finally, and this is the most annoying thing about it, so much of the book seems to be the sum of the common pieties held at the time of writing by a group of eminent bien pensants, shared by Economist editors, the FT editorial pages (not the WSJ’s thank god), academia, central banks, and government. The Global Economic Establishment, or in other words, The Man.

Dr El Erian is a full card carrying member of this group. Check out the dust cover, where the critics rave. Who are the critics? Basically, Dr El Erian’s mates: Alan Greenspan, PIMCO adviser; Bill Gross (PIMCO colleague, like he was going to trash the book), Nobel Prize winner Michael Spence who has written papers with Dr El Erian; Niall Ferguson, professor at Harvard where Dr El Erian managed the endowment. There are others I can’t properly place, but I reckon they must be regular lunch partners or maybe the publisher begged them to say something: these include Fareed Zakaria, Nouriel Roubini, and, oh woe, Nicholas Taleb, who clearly hangs out with the tie wearers now. Dr. El Erian writes a lot for the FT; FT columnists Martin Wolf (also a colleague at the IMF) and Gillian Tett are quoted approvingly throughout, or at least were, until I stopped reading. So much of the book seems to me like an exercise in mutual backscratching, like a bunch of extremely intelligent chimpanzees grooming each other, picking their nits and gibbering.

A very eminent lot. Dr El Erian is no stranger to eminence. Check out the “about the author” bit at the back. Most authors have about a paragraph devoted to this: school, first job, other books they have written, a bit about hobbies, invariably ending with “<insert authors name> lives with his wife Marjorie, his two children Bruce and Sheila, and their dog, Spot.” Or something like that. Dr. El Erian’s ends similarly, but before that goes on for two whole pages, and doesn’t miss out a single role, from the IMF to Citi, to PIMCO, to Harvard and back to PIMCO again. We get every committee he is on, and behold! one of them is even called a “Committee of Eminent Persons!” Illustriousness shines from every corner; he is a member of the Fortune Mutual Fund Dream Team (whatever that is; a narcoleptics support club?), and finally, we are pleased to learn he is officially one of the “Ten Most Influential Europeans in America”. Which must be very nice indeed.

“But Baruch,” you might say, “if it is such a bad book, how come it got that FT award and all that stuff? Surely there must be something to it.” Well, maybe not. It strikes me that there was something fishy in the award of Best Business Book of 2008. I think 3 of the 6 judges might have been nobbled. Lionel Barber, editor of the FT and commissioner of many El Erian editorials may have been kindly disposed towards him already. Harvard chum Niall Ferguson was already quoted on the dust cover of the book he was judging, saying he could “think of no better guide to the terrifying yet exhilarating new world of global finance”. Sounds like he had already made up his mind. And finally Lloyd Blankfein Chairman and CEO of Goldman, Sachs, may have been swayed by the fact he was being asked to judge a book written by the co-managing director of his biggest global fixed income client. The other judges may have split their vote on the other 5 entries. It may be that these other book were not all that good either. The world doesn’t need another encomium of Warren Buffett, for instance. But I did read Misha Glenny’s McMafia and thought it was rather good.

A dull style is a killer of any book, but beside that I think it is fantastically hard to write a good and accessible book about investing that tries to enunciate an actual trading position, like this one. The only format that seems to work is historical narrative. As an example, I read JK Galbraith’s 1957 The Great Crash recently and thought it was great and devoured it in a couple of hours. Maybe I only liked it because it was so fantastically rude about the eminent people of the time. Does anyone know any books along the lines of El Erian’s that have actually worked?

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13 thoughts on “Markets don’t actually collide, you know”

One has to consider his audience. Perhaps some readers of this blog and your good self will find it obvious but it may not be to others. However touche on the dullness of delivery.

As for books on investing, why not stuff by Ken Fisher? The man has the track record, passion, experience and lineage, his books have genuinely interesting ideas, they do not cost thousands of dollars because they are out of print, and it doesn’t mess around with technojargon.

I’m about two-thirds of the way through this book, and I’m really enjoying it, and plan to read through to the end. I mainly bought it on the back of a talk he gave to CFA candidates in California in the middle of last year, which is available on the CFA website.
I think that the reason I like it so much is because I have a similar educational background to Mr El-Erian (I studied economics at the same university as him), and the book has helped to rekindle my memories of the economics I learned back then, and apply it to the present day. However, it’s equally clear to me that the style is very much that of an academic economist, and I can imagine that this is not for everyone. Plus, as the review points out, there is an awful lot of framing questions, and pointing out tendencies, without actually coming out and making firm predictions.
Nonetheless, even though the book was basically written in late 2007 and early 2008, I think a lot of what it says is applicable. That’s mainly because it’s not talking about the short term effects of the leverage bubble, but about the longer term effects of high savings in emerging markets, and of financial innovation in general. If you can find the talk on the CFA website, I recommend you do so – it was in the middle of 2008, and has a lot more meat in it, because I suspect the audience wouldn’t tolerate the style of the book, and its somewhat circular approach.
If you have in mind that, in general, he wants to warn investors against assuming that there will always be mean reversion, and that you should manage your tail risks, then the book starts to make a lot more sense.

Ryan, that Ken Fisher, doesn’t he go on about hgow we should alwways buy stocks, like all the time? Wouldn’t that be sort of wrong? At the moment.

My problem with having a clear directional position on stocks, bonds or whatever in a book, is that the market has a way of making one look a spazzer after a while. A book is a long-lived thing, one will be remembered for it after one is gone, one hopes. Being wrong and/or irrelevant after a certain while is probably inevitable.

I agree that el-Erian’s book is poorly written and of little practical value. I did slog my way through to the end, and it didn’t get any more compelling as it went. There are some investing books that are worth reading despite their stylistic infelicities: the work of Martin Whitman comes to mind. But el-Erian’s book fails to reveal anything interesting about Pimco’s core competence: working closely with the government to get what one wants.

Yes, it was Cambridge. I’m now about 200 pages in, and reading in the light of your review, I can see how the writing style is annoying – there is a lot of foreshadowing (“We will discuss” “I will look at”) and then recapping (“As I showed” “We have reviewed”), and it seems it’s all sizzle and no sausage. Also, I’m shocked and amused that an author of El-Erian’s stature needs to ask his friends to write complimentary blurbs – I’m sure there are enough reviews that can be quoted, and that would be a bit more serious. Plus the lead testimonial from Greenspan is worth a lot less than it was a year or so ago.

But the sausage is there – he really is looking beyond the immediate problems of the US and European banking systems, at the more fundamental causes of those problems, namely, that the banks got over-leveraged because there was so much more liquidity sloshing about. This discussion has helped me, because it helps to distill a view about which tendencies will stay, and which will dissipate.

In particular, the savings of emerging economies, especially Asian ones, will continue to be positive, and will be looking for a home. That led to a huge under-pricing of risk, which is currently being corrected, and will probably over-shoot. But the money will still be there, and I need to think about what it will do once things have settled down. And for this, I found El-Erian’s discussion in terms of liquidity preference very helpful. Now, maybe this is because I’m just more used to this Keynesian model, with a neoclassical overlay, and I just happen to be the perfect audience for this book. But I would recommend it to any economist as a way to think about the broader picture within a theoretical framework that’s a little more developed than what they read in Samuelson.

Another thing I like is that while giving comfort that there is a destination for the world economy that does not involve the complete collapse of the fiat money system and a 1930s style depression, he takes pains to point out that the journey taken will affect the destination. This is important in the context of the bank bailout currently underway in the US and Europe. If the banking system is one of the engines of the boat that will bring us to our destination, then the speed and quality of the repair work will determine the speed of the trip, and exactly where we make landfall.

One real criticism that I have is that he is certain that Asian and commodity country consumption can compensate for the demand fall that will result from a restoration of US savings – as far as I understand it, they are really quite different magnitudes.

Tom, you are redeemed. But I don’t think he does give any comfort that “there is a destination for the world economy that does not involve the complete collapse of the fiat money system and a 1930s style depression” as you put it. He wrote this book before the onset of our current troubles.

In fact since then from reading his op-eds I get the impression he is much more worried. Taken to its logical conclusion, his “heart attack” metaphor represents a non-negligible risk of death, and almost certainly a lengthy recuperation and period of sustained weakness.

He doesn’t say We are all going to have a collective “heart attack” in the book at all, does he?

I agree that Ken’s been wrongly bullish and that is something that hasn’t sat well.

But mastery of all asset classes and being able to choose between them is too much to ask from a book on investing* (“The Intelligent Investor?”) I think that in stocks he does it rather well, better than most, and on this subject there is the proven long term positive track record, original ideas, and written in a style that will not bore you to death.

On stocks as an asset class (and because of indexing and limited liability) wouldn’t it be the logical choice for having the largest allocation in a market neutral environment – by construction the upside is unlimited.

*There is an asset allocation book by David Darst that looks interesting, but seems to be more instructional than philosophical as I suspect you would appreciate.